If you are planning on buying a home, getting a mortgage pre-approval is recommended. This is because, with a letter of pre-approval, you will be able to know your budget as far as the type of home you will get. Getting armed with a pre-approval is also great in cases where you are competing for a home that is in high demand. This is because a pre-approval will give you an edge over other potential buyers since it demonstrates both your seriousness and ability to purchase the home.
However, before applying for a pre-approval, it is important to get your financial affairs in order. This is because the amount that the lender will pre-approve you for will depend on your financial status. Your financial status will also determine the terms of the loan, especially when it comes to the interest rate that will be applied on your loan.
Given how important the process of pre-approval is, it is imperative that you take all the necessary steps to ensure that you not only get the desired amount, but also the best terms possible. The following are tips that will come in handy in improving your odds of success.
Pay attention to your credit score
Your credit score will play the most important role when it comes to determining the amount you will be pre-approved for. It will also play a role in determining the interest you will pay since your credit score is generally an indication of how risky you are to the person providing the mortgage.
Therefore, if you have a bad credit score, make sure that you improve it before applying for a pre-approval. To do this, pay off any small outstanding debts, and start paying your bills on time. You can even apply for a review of your credit score. Do this even if your credit score is already good because improving it even by the smallest of margins will play a huge role in the pre-approval process.
Reduce your debt-to-income ratio
A debt-to-income ratio is simply an indication of the share of your income that goes to pay off debt. If this ratio is high, it usually implies that you carry more defaulting risk. This is because in such a case, you theoretically have little to no money left after taking care of your debts. This then decreases your chances of successfully paying off the mortgage.
To avoid getting pre-approved for a lower amount, or receiving a high mortgage rate, you can pay off some of your debt. If you have several credit cards, you can cancel some of them. Increasing your income will also help.
If pre-approval success means getting the best possible terms on a mortgage and getting the highest amount possible, shopping around is a significant key to success. Not all lenders are the same, which means that they apply different methodologies in assessing risk. Furthermore, some lenders will offer you better terms if you demonstrate a willingness to walk away. Knowing you have options will also help with your negotiations, something that will definitely help to get you better terms.
Even with these tips, you may still find the process challenging. In such a case, don’t be afraid to ask the lender for help or for clarification. There are also teams of mortgage experts, like Think Plutus, who can give you all the help you need to get the best mortgage terms.